Buying a Dental Practice? Here’s What You Need to Know First. (Part 1: Appealing to Patients)

When buying a dental practice, especially if you’re fresh out of dental school or haven’t bought a practice before, it’s dangerously easy to caught up in information overload. When you meet with the current owner or practice broker, you’re typically given a thick, wordy notebook full of stats, charts, receipts, and every detail about the practice compiled into one overwhelming mess.

You’re a dentist, not a real estate agent or due diligence expert. How are you supposed to know if the practice is a good deal, or if the practice will suit your needs as a dental professional? This article is about how to cut right through all the irrelevant info and make an informed decision.

It’s deceptively easy to get tunnel vision and only focus on the one number that seems relevant: the asking price of the practice. Too often, a potential buyer will lose sleep over this one big round cash figure and lose sight of the bigger picture. Don’t fall into this short-sighted trap. In reality, the big question is this:

Will I be able to match or exceed the current profitability of the practice?

As a dental consultant working with dentists in Georgia and beyond, I’ve had the opportunity to help many young dentists discover not only how to buy a dental practice, but also how to do it seamlessly and affordably. Performing due diligence for these practices is rewarding for me, as I’m always pleased when I can advise a dentist to happily move forward with his or her dream of practice ownership. Likewise, I’m also pleased when I can prevent a young dentist from making a huge mistake by purchasing a practice that’s not a good fit.

This isn’t only actionable advice for the prospective buyer, but also for any selling dentists looking to make their for-sale practice all the more attractive to dentists looking to buy.

This article is Part 1 of a 2-part series and will focus on the overall appeal of the practice.

LOCATION

What are the demographics of the practice location? Is the practice in a very visible building with great signage and lots of passerby traffic, or is it buried in the bowels of a commercial complex? When you drive around the area, do you see Starbucks, Ruth’s Chris Steak House, and thriving shopping areas, or do you see deserted storefronts, Payday Loans and Bail Bonds? What about the curb appeal? The local property value? These things may seem like details to you, but are huge considerations for your future patients.

There are a few sneaky litmus tests that can clue you in to the affluence level of an area:

Research the local schools. If 90% of the students are on government subsidized free lunch programs (and often breakfast too), this is a bad sign.
Peek at the residential real estate market. Are the prices of homes rising, falling, or remaining flat? Are young families moving in, or are they leaving?
What’s the average income and education level in the area? It’s not only important to understand what the location demographics tell you now; you must project what the area will be like in five, ten, and fifteen plus years into the future.

FACILITY AND EQUIPMENT

During the two years following buying a dental practice, how much will you have to be spend on remodeling, redecorating, or equipment upgrading? It’s not critical that the practice meets your every functional, esthetic and technological requirement immediately, but the hidden costs that will be incurred just to bring your practice up to speed will linger for long after you get the keys to the front door. It’s probably obvious when a practice needs new chairs or lights. But new computer systems? Updated software? Fresh Dentrix licenses? You’ll have to do some digging to find out if these are things you have to buy.

The office should meet your minimal needs and should be expandable to at least five operatories. If you can’t tolerate for one day the 1970’s wood paneling in the reception room, you should add the cost of changing this to the sales price of the practice. Immediately after the sale, a new dentist should make only the changes that will directly improve the productivity of the practice.

STAFFING

Make certain that the practice owner provides you with a detailed list showing all staff members, their dates-of-hire, salaries, benefits, last pay raises, plus short bios highlighting their performance level and value to the practice. You want to know who the superstars are and who your “marginal” employees are. When team members have been with the practice for a long time, there is a greater likelihood that they will provide an equivocal level of service and dedication after the practice changes hands.

Be certain to calculate the total percentage being paid for all staff salaries and benefits. A healthy ratio will be below 30%. In offices with long-term employees of 10, 15, and 20 plus years, you will frequently encounter salaries that are above the value to the practice. Because you want to do everything possible to maintain the goodwill of the team members, you should avoid making adjustments to their salaries when you first take over the practice.

I also sometimes find hygienists that are under producing and overpaid. An efficient hygienist

should have a Net Production (Gross Production minus all adjustments) of around three times her salary and benefits. I have seen situations where the hygienists are being paid most of the profits from their production.

FEE SCHEDULE

You must know if the practice fees are low, high, or average for the area when assessing whether buying a dental practice is the right choice. I’ve encountered situations where the practice fees were below some PPO fee schedules. In these cases, the practice receives less reimbursement than it is entitled. No insurance company will reimburse a dentist for more than he or she asks. When evaluating the impact of raising fees, focus on the top twenty procedures which produce the greatest income. For this analysis, you will need the Production by Procedure Report (sequenced by total revenue).

A low fee profile can produce both challenges and opportunities. Increasing fees can often be the quickest way to increase practice profitability. Unfortunately, the period of time immediately after purchasing the practice is the worst possible time to raise fees. Depending on how much the fees need to be increased, the adjustments may occur over a one-year period or greater. Keep in mind that increasing the prophylaxis fee (1110) will have a greater impact on patient perception than increasing your porcelain crown fee (2740).

Be on the lookout my next cautionary blog post about buying a dental practice, that one focusing on the overall profitability of a practice and the drivers behind it (coming next month).

Considering buying a practice, and still feeling a little overwhelmed? Let’s talk about your options – no obligation.

I’m here to help.

All the best,

Dr. Mike Goldstein
Dental Consultant
Atlanta, Georgia